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Detecting Asset Price Bubbles: A Multifactor Approach

Author

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  • Andr Tomfort

    (Department of International Finance, Berlin School of Economics and Law, Badensche Str. 50-51, 10825 Berlin, Germany.)

Abstract

Asset price bubbles and deep financial crises have occurred frequently over the past three decades. No wonder that decision makers are searching for ways to protect their economies. Recognizing price bubbles in time could be very helpful in this regard to implement counter measures such as higher interest rates, taxes or capital buffers. In this paper a solution to this problem shall be proposed: A multifactor valuation approach based on a discounted cash flow and a cointegration model that links asset prices with selected variables to determine the valuation of a market. In addition, the gaps of credit and private fixed investments to gross domestic product are measured to assess whether the economy is facing overleveraging and overinvestment. If the four measures lead to a clear picture, policy makers are advised to take action. An exemplary analysis has been done for the former bubbles in Japan, and in the US stock and housing market.

Suggested Citation

  • Andr Tomfort, 2017. "Detecting Asset Price Bubbles: A Multifactor Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 46-55.
    • Handle: RePEc:eco:journ1:2017-01-08
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    References listed on IDEAS

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    3. Imad A. Moosa, 2022. "Fintech," Books, Edward Elgar Publishing, number 21229.

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    More about this item

    Keywords

    Asset Price Bubbles; Cointegration; Credit and Investment Expansion;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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